EU takes on US in tit-for-tat bank row

The EU will require big foreign banks operating in Europe to set aside billions in reserve funds in a tit-for-tat move against the United States that could also affect post-Brexit Britain, according to a draft proposal seen by AFP.

The European Commission will announce today (23 November) a series of new banking regulations that will include the new requirement.

“We are actually mirroring what the US has already done,” a European source said in advance of the announcement of the new capital requirements.

The US in 2014 angered Brussels when it suddenly required major European banks – such as Germany’s Deutsche Bank – to park billions in the United States in case problems at their subsidiaries threatened to involve the US taxpayer.

International Monetary Fund officials sought to play down the risk of an imminent crisis over Deutsche Bank yesterday (5 October) and expressed confidence that German and European authorities were working to ensure stability.

The EU warned at the time that these extra costs risked sparking a protectionist reaction in Europe.

If approved into EU law, the new measure would require major US banks such as Goldman Sachs and JP Morgan to set aside extra capital so that their operations in Europe could be wound up separately if needed.

Lawmakers in Brussels see more cause to pass laws to curb derivatives trading, as the only bank to yield profits during the financial crisis is charged with knowingly reselling shoddy mortgages to benefit a hedge fund counting on their demise.

The Financial Times, which first reported the proposal, said that this would force the banks to raise billions of euros to keep operating in Europe.

The rules could also pose a threat to the City of London after the UK completes its Brexit divorce from the European Union.

France’s Hauts-de-Seine department, west of Paris, has launched a poster campaign at London’s St Pancras railway station and Heathrow airport, in an effort to seduce the City’s bankers across the Channel. EURACTIV’s partner La Tribune reports.

A person familiar with the thinking of US banks said the proposal would result in a “more onerous process to do business in the EU,” as well as some additional capital set-asides.

One of the questions “is how this broader trend of this tit-for-tat between national jurisdictions will play out,” said this person. “This could be the first of many similar” issues.

“The national jurisdictions are pushing back against much of the international process right now,” said the person familiar with US banks. “Definitely the national governments are heavily involved in protecting their institutions.”

Large US banks have based their European headquarters in London and could be forced to relocate key operations to other European cities due to Brexit.

France will accelerate and simplify the registration of financial companies looking to leave the City of London ahead of the UK’s exit from the EU, the country’s regulators announced on Wednesday (28 September). EURACTIV’s partner La Tribune reports.

Depending on how the Brussels capital requirements rule is set, banks could be forced to establish holding companies in one or more European countries and then to hold capital for each of these entities.

The measure by the EU comes amid spats with the US over Apple and Deutsche Bank and squabbles about Airbus and Boeing and will exacerbate further the strains in US-European economic relations.

French President François Hollande yesterday (12 October) accused the United States of abusing its power by demanding multi-billion dollar fines from European companies, stoking an increasingly bitter trans-Atlantic dispute.

Outgoing US Treasury Secretary Jacob Lew has repeatedly accused the Europeans of disproportionately focusing on US corporations.

President-elect Donald Trump meanwhile ran his campaign on a promise to be especially sensitive to protecting US companies and jobs against foreigners.

“The European Commission took some time to respond to the US authorities,” said Nicolas Veron, an economist at the Peterson Institute for International Economics in Washington and at the Brussels-based think tank Bruegel.

“Where it gets complicated is over Brexit. The British will say this is a stab in the back even before the start of Brexit negotiations,” he added.

The proposals will face close scrutiny “as long as Britain remains in the EU,” Veron said.

This could be far more damaging for international trade than Brexit or the new US president combined. There is some logic to the US protection of dollar-based transaction responsibility – given its high percentage of world trade and investment – but that is not the case for the euro. We could end up with every country looking to protect its own banking structure in this way, bringing about greater fragmentation (and higher costs and risks) in many aspects of capital management.
This at a time when the inter-bank systems,such as SWIFT, are struggling to deal with major IT issues – and Blockchain is far from sufficiently developed to take over from it.
Finally, politically, what could suit Trump more than such a trade war to disrupt trade issues with Europe?